In a process plant, various processes are employed to produce amounts of a desired product. To measure general performance of manufacturing operations of a product, it has been traditional to count the amount of product produced over a certain period of time of operation and from that amount calculate a cost per unit product made. The cost per unit product made is based on a standard costs function for the operation, typically developed at the beginning of a fiscal time period and used throughout that period. The ratio (cost per unit product made) is used in periodic reports to manufacturing management to evaluate manufacturing performance and over the years has generally served as the primary measure of manufacturing performance.
One disadvantage to this approach to measuring manufacturing performance is that all plant costs are allocated to each product or product line in the determination of cost per unit product. However, most of the costs in a manufacturing plant are not directly assignable to a product or product line and therefore must be allocated based on other factors. The factors usually have more to do with the perceived performance of the manufacturing operation than the actually occurring manufacturing practices.
A second disadvantage is a considerable percentage of the costs in a manufacturing plant that are used to calculate the cost per unit product made is totally out of the scope of manufacturing's authority. Thus, the performance measurement of cost per unit product made has led to a pure "volume base" manufacturing approach, which may not be the best approach to meet market and corporate requirements.
Another disadvantage is that the calculation to determine cost per unit product made is based on the amount of each product or product line that is produced and is not sensitive to any specific problems incurred in the production of a specific product. For example, if a bad batch of a given product is produced and thrown away, the standard allocation algorithm has no way of assigning the costs associated with that batch to the specific product. Instead these costs are allocated to all products made.
Other approaches to measuring manufacturing performance involve non-cost/non-financial measurements and include measurements of quality, delivery integrity and customer satisfaction. These approaches have been directed primarily to the discrete manufacturing industry and still involve collecting information and displaying results in the traditional daily, weekly or monthly report format. Hence, such approaches do not timely provide measurements such that operations personnel can improve on the process on which the measurements were made.